Backflush Costing
BACKFLUSH COSTING
Definition of Backflush Costing :
A streamlined cost accounting method that speeds up, simplifies, and reduces accounting effort in an environment that minimizes inventory balances, requires few allocations, uses standard costs, and has minimal variances from standard
Product costing approach, used in a just - intime (jit) operating environment, in which costing is delayed until goods are finished. Standard costs are then flushed backward through the system to assign costs to products. The result is that detailed tracking of costs is eliminated. The system is best suited to companies that maintain low inventories because costs then flow directly to cost of goods sold. Work-in-process is usually eliminated, journal entries to inventory accounts may be delayed until the time of product completion or even the time of sale, and standard costs are used to assign costs to units when journal entries are made, that is, to flush costs backward to the points at which inventories remain.
Characteristics Of Companies Adopting Backflush Costing :
The companies adopting backflush costing often meet the following three conditions :
1. Management wants a simple accounting system and no detailed tracking of direct material and direct labour through a series of operations is required.
2. Each product has a set of standard cost.
3. Material inventory levels are either low or constant.
If inventories are low, the bulk of manufacturing costs will flow into costs of goods sold and it is not deferred as inventory cost. Backflush costing is especially attractive in companies that have low inventories resulting from JIT.
What are the advantages of Backflush Costing :
1. Less entries have to be passed so it saves time. (major benefit)
2. Less costly as less documentation have to be maintained.
3. It uses JIT environment which saves holding cost of inventory
What are the disadvantages of Backflush Accounting :
1. One
Definition of Backflush Costing :
A streamlined cost accounting method that speeds up, simplifies, and reduces accounting effort in an environment that minimizes inventory balances, requires few allocations, uses standard costs, and has minimal variances from standard
Product costing approach, used in a just - intime (jit) operating environment, in which costing is delayed until goods are finished. Standard costs are then flushed backward through the system to assign costs to products. The result is that detailed tracking of costs is eliminated. The system is best suited to companies that maintain low inventories because costs then flow directly to cost of goods sold. Work-in-process is usually eliminated, journal entries to inventory accounts may be delayed until the time of product completion or even the time of sale, and standard costs are used to assign costs to units when journal entries are made, that is, to flush costs backward to the points at which inventories remain.
Characteristics Of Companies Adopting Backflush Costing :
The companies adopting backflush costing often meet the following three conditions :
1. Management wants a simple accounting system and no detailed tracking of direct material and direct labour through a series of operations is required.
2. Each product has a set of standard cost.
3. Material inventory levels are either low or constant.
If inventories are low, the bulk of manufacturing costs will flow into costs of goods sold and it is not deferred as inventory cost. Backflush costing is especially attractive in companies that have low inventories resulting from JIT.
What are the advantages of Backflush Costing :
1. Less entries have to be passed so it saves time. (major benefit)
2. Less costly as less documentation have to be maintained.
3. It uses JIT environment which saves holding cost of inventory
What are the disadvantages of Backflush Accounting :
1. One